Is integration the best way to achieve benefits for shareholders?
Integration is a form of external business growth, in which two firms come together, and form a larger firm. This union could be between any two firms, and it is not necessary that they come from the same industry. The two integrating firms may decide to combine their resources and become a new company altogether, doing away with their previous names. This is a merger. In other cases, one company would “acquire” the other by buying it over. The acquiring company then ‘grows’.
There are many reasons why two companies would choose to come together. The advantages vary from industry to industry, however the most common one is that the bigger business formed would be able to enjoy the benefits of being large.
A large business would be able to enjoy the economies of scale such as purchasing economies, marketing economies, financial economies, managerial economies and technical economies therefore reducing their costs. Being big, they would be able to reach more of the market for a product, and thus have a greater market share. They would also have more influence when dealing with suppliers since they could become the main buyer of raw materials. Being big also allows the business to spread its risk about different places or markets, and thus gives it more stability.
Usually two businesses integrate with the plan of obtaining synergy. It is believed that working together, the two firms would be able to produce more output than if they worked alone. Overlapping departments and functions in the companies could be removed, and they could reduce the total overhead costs. The integration also allows them to have more advantage competing with the other businesses. Integration works in the principle that the productivity of the new business as a whole would be greater than the total productivity of the two smaller businesses.
When a business does well, then shareholders may receive more dividends. This is one benefit of integration towards the shareholders when a business becomes big. Secondly, a big business would be more stable.
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